consti - gamboa v finance secretary (2012)

8/12/2019 Consti - Gamboa v Finance Secretary (2012)

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Republic of the PhilippinesSUPREME COURT

Manila

EN BANC

G.R. No. 176579 October 9, 2012

HEIRS OF WILSON P. GAMBOA,* Petitioners,vs.FINANCE SECRETARYMARGARITO B. TEVES, FINANCE UNDERSECRETARYJOHN P.SEVILLA, AND COMMISSIONER RICARDO ABCEDE OF THE PRESIDENTIAL COMMISSIONON GOOD GOVERNMENT(PCGG) IN THEIR CAPACITIES AS CHAIR AND MEMBERS,RESPECTIVELY, OF THE PRIVATIZATION COUNCIL, CHAIRMAN ANTHONI SALIM OF FIRSTPACIFIC CO., LTD. IN HIS CAPACITY AS DIRECTOR OF METRO PACIFIC ASSET HOLDINGSINC., CHAIRMAN MANUEL V. PANGILINAN OF PHILIPPINE LONG DISTANCE TELEPHONECOMPANY (PLDT) IN HIS CAPACITY AS MANAGING DIRECTOR OF FIRST PACIFIC CO., LTD.,PRESIDENT NAPOLEON L. NAZARENO OF PHILIPPINE LONG DISTANCE TELEPHONE

COMPANY, CHAIR FE BARIN OF THE SECURITIES AND EXCHANGE COMMISSION, andPRESIDENT FRANCIS LIM OF THE PHILIPPINE STOCK EXCHANGE, Respondents.

PABLITO V. SANIDAD and ARNO V. SANIDAD, Petitioner-in-Intervention. R E S O L U T I O N

CARPIO, J.:

This resolves the motions for reconsideration of the 28 June 2011 Decision filed by (1) the PhilippineStock Exchange's (PSE) President, 1 (2) Manuel V. Pangilinan (Pangilinan),2 (3) Napoleon L.Nazareno (Nazareno ),3and ( 4) the Securities and Exchange Commission (SEC)4 (collectively,

movants ).

The Office of the Solicitor General (OSG) initially filed a motion for reconsideration on behalfoftheSEC,5 assailing the 28 June 2011 Decision. However, it subsequently filed a Consolidated Commenton behalf of the State,6declaring expressly that it agrees with the Court's definition of the term"capital" in Section 11, Article XII of the Constitution. During the Oral Arguments on 26 June 2012,the OSG reiterated its position consistent with the Court's 28 June 2011 Decision.

We deny the motions for reconsideration.

I.

Far-reachin g implicatio ns of the legal issue justi fy

treatment of peti t ion for declaratory r elief as o ne for m andamus.

As we emphatically stated in the 28 June 2011 Decision, the interpretation of the term "capital" inSection 11, Article XII of the Constitution has far-reaching implications to the national economy. Infact, a resolution of this issue will determine whether Filipinos are masters, or second-class citizens,in their own country. What is at stake here is whether Filipinos or foreigners will have effective

contro l of the Philippine national economy. Indeed, if ever there is a legal issue that has far-reaching implications to the entire nation, and to future generations of Filipinos, it is the thresholdlegal issue presented in this case.

http://www.lawphil.net/judjuris/juri2012/oct2012/gr_176579_2012.html#fnt1
























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Contrary to Pangilinan’s narrow view, the serious economic consequences resulting in theinterpretation of the term "capital" in Section 11, Article XII of the Constitution undoubtedly demandan immediate adjudication of this issue. Simply put, the far-reaching implications of this issue

justify the treatment of the petition as one for mandamus.7

In Luzon Stevedoring Corp. v. Anti-Dummy Board ,8 the Court deemed it wise and expedient to

resolve the case although the petition for declaratory relief could be outrightly dismissed for beingprocedurally defective. There, appellant admittedly had already committed a breach of the PublicService Act in relation to the Anti-Dummy Law since it had been employing non- American alienslong before the decision in a prior similar case. However, the main issue in Luzon Stevedoring wasof transcendental importance, involving the exercise or enjoyment of rights, franchises, privileges,properties and businesses which only Filipinos and qualified corporations could exercise or enjoyunder the Constitution and the statutes. Moreover, the same issue could be raised by appellant in anappropriate action. Thus, in Luzon Stevedoring the Court deemed it necessary to finally dispose ofthe case for the guidance of all concerned, despite the apparent procedural flaw in the petition.

The circumstances surrounding the present case, such as the supposed procedural defect of thepetition and the pivotal legal issue involved, resemble those in Luzon Stevedoring. Consequently, inthe interest of substantial justice and faithful adherence to the Constitution, we opted to resolve thiscase for the guidance of the public and all concerned parties.

II.

No change of any lo ng-standing rule;

thus, no redefin it ion of the term " capi tal ."

Movants contend that the term "capital" in Section 11, Article XII of the Constitution has long beensettled and defined to refer to the total outstanding shares of stock, whether voting or non-voting. Infact, movants claim that the SEC, which is the administrative agency tasked to enforce the 60-40ownership requirement in favor of Filipino citizens in the Constitution and various statutes, hasconsistently adopted this particular definition in its numerous opinions. Movants point out that withthe 28 June 2011 Decision, the Court in effect introduced a "new" definition or "midstream

redefinition"9 of the term "capital" in Section 11, Article XII of the Constitution.

This is egregious error.

For more than 75 years since the 1935 Constitution, the Court has not interpreted or defined theterm "capital" found in various economic provisions of the 1935, 1973 and 1987 Constitutions. Therehas never been a judicial precedent interpreting the term "capital" in the 1935, 1973 and 1987Constitutions, until now. Hence, it is patently wrong and utterly baseless to claim that the Court indefining the term "capital" in its 28 June 2011 Decision modified, reversed, or set aside the purportedlong-standing definition of the term "capital," which supposedly refers to the total outstanding sharesof stock, whether voting or non-voting. To repeat, until the present case there has never been aCourt ruling categorically defining the term "capital" found in the various economic provisions of the

1935, 1973 and 1987 Philippine Constitutions.

The opinions of the SEC, as well as of the Department of Justice (DOJ), on the definition of the term"capital" as referring to both voting and non-voting shares (combined total of common and preferredshares) are, in the first place, conflicting and inconsistent. There is no basis whatsoever to the claimthat the SEC and the DOJ have consistently and uniformly adopted a definition of the term "capital"contrary to the definition that this Court adopted in its 28 June 2011 Decision.















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In DOJ Opinion No. 130, s. 1985,10 dated 7 October 1985, the scope of the term "capital" in Section9, Article XIV of the 1973 Constitution was raised, that is, whether the term "capital" includes "bothpreferred and common stocks." The issue was raised in relation to a stock-swap transactionbetween a Filipino and a Japanese corporation, both stockholders of a domestic corporation thatowned lands in the Philippines. Then Minister of Justice Estelito P. Mendoza ruled that the resultingownership structure of the corporation would beunconstitutional because 60% of the voting stock

would be owned by Japanese while Filipinos would own only 40% of the voting stock, although whenthe non-voting stock is added, Filipinos would own 60% of the combined voting and non-votingstock. This ownership structure is remarkably similar to the current ownership structure ofPLDT. Minister Mendoza ruled:

x x x x

Thus, the Filipino group still owns sixty (60%) of the entire subscribed capital stock (common andpreferred) while the Japanese investors control sixty percent (60%) of the common (voting) shares.

It is your position that x x x since Section 9, Article XIV of the Constitution uses the word"capital," which is construed "to include both preferred and common shares" and "that

where the law does not distinguish, the courts shall not distinguish."

x x x x

In light of the foregoing jurisprudence, it is my opinion that the stock-swap transaction inquestion may not be constitutionally upheld. While it may be ordinary corporate practice toclassify corporate shares into common voting shares and preferred non-voting shares, anyarrangement which attempts to defeat the constitutional purpose should be eschewed. Thus, theresultant equity arrangement which would place ownership of 60%11 of the common (voting)shares in the Japanese group, while retaining 60% of the total percentage of common andpreferred shares in Filipino hands would amount to circumvention of the principle of controlby Philippine stockholders that is implicit in the 60% Philippine nationality requirement in theConstitution. (Emphasis supplied)

In short, Minister Mendoza categorically rejected the theory that the term "capital" in Section 9, Article XIV of the 1973 Constitution includes "both preferred and common stocks" treated as thesame class of shares regardless of differences in voting rights and privileges. Minister Mendozastressed that the 60-40 ownership requirement in favor of Filipino citizens in the Constitution is notcomplied with unless the corporation "satisfies the criterion of beneficial ownership" and that inapplying the same "the primordial consideration is situs of control."

On the other hand, in Opinion No. 23-10 dated 18 August 2010, addressed to Castillo Laman TanPantaleon & San Jose, then SEC General Counsel Vernette G. Umali-Paco applied the VotingControl Test, that is, using only the voting stock to determine whether a corporation is a Philippinenational. The Opinion states:

Applying the foregoing, particularly the Control Test, MLRC is deemed as a Philippine nationalbecause: (1) sixty percent (60%) of its outstanding capital stock enti t led to vote is owned by aPhilippine national, the Trustee; and (2) at least sixty percent (60%) of the ERF will accrue to thebenefit of Philippine nationals. Still pursuant to the Control Test, MLRC’s investment in 60% ofBFDC’s outstanding capital stock enti t led to vote shall be deemed as of Philippinenationality, thereby qualifying BFDC to own private land.










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Further, under, and for purposes of, the FIA, MLRC and BFDC are both Philippine nationals,considering that: (1) sixty percent (60%) of their respective outstanding capital stock enti t led to

vote is owned by a Philippine national (i.e., by the Trustee, in the case of MLRC; and by MLRC, inthe case of BFDC); and (2) at least 60% of their respective board of directors are Filipino citizens.(Boldfacing and italicization supplied)

Clearly, these DOJ and SEC opinions are compatible with the Court’s interpretation of the 60 -40ownership requirement in favor of Filipino citizens mandated by the Constitution for certain economicactivities. At the same time, these opinions highlight the conflicting, contradictory, and inconsistentpositions taken by the DOJ and the SEC on the definition of the term "capital" found in the economicprovisions of the Constitution.

The opinions issued by SEC legal officers do not have the force and effect of SEC rules andregulations because only the SEC en banc can adopt rules and regulations. As expressly provided inSection 4.6 of the Securities Regulation Code,12 the SEC cannot delegate to any of its individualCommissioner or staff the power to adopt any rule or regulation. Further, under Section 5.1 of thesame Code, it is the SEC as a col legial body , and not any of its legal officers, that isempowered to issue opin ions and approve rules and regulations. Thus:

4.6. The Commission may, for purposes of efficiency, delegate any of its functions to anydepartment or office of the Commission, an individual Commissioner or staff member of theCommission exceptits review or appellate authority and its power to adopt, alter and supplementany rule or regulation.

The Commission may review upon its own initiative or upon the petition of any interested party anyaction of any department or office, individual Commissioner, or staff member of the Commission.

SEC. 5. Powers and Functions of the Commission.- 5.1. The Commission shall act with transparencyand shall have the powers and functions provided by this Code, Presidential Decree No. 902-A, theCorporation Code, the Investment Houses Law, the Financing Company Act and other existing laws.Pursuant thereto the Commission shall have, among others, the following powers and functions:

x x x x

(g) Prepare, approve, amend or repeal rules, regulations and orders, and issue opinions andprovide guidance on and supervise compliance with such rules, regulations and orders;

x x x x (Emphasis supplied)

Thus, the act of the individual Commissioners or legal officers of the SEC in issuing opinions thathave the effect of SEC rules or regulations is ultra vires. Under Sections 4.6 and 5.1(g) of the Code,only the SEC en banc can "issue opinions" that have the force and effect of rules or regulations.Section 4.6 of the Code bars the SEC en banc from delegating to any individual Commissioner or

staff the power to adopt rules or regulations. In short, any opinion of individual Commissionersor SEC legal officers does not constitute a rule or regulation of the SEC .

The SEC admits during the Oral Arguments that only the SEC en banc , and not any of its individualcommissioners or legal staff, is empowered to issue opinions which have the same binding effect asSEC rules and regulations, thus:

JUSTICE CARPIO:







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So, under the law, it is the Commission En Banc that can issue an

SEC Opinion, correct?

COMMISSIONER GAITE:13

That’s correct, Your Honor.

JUSTICE CARPIO:

Can the Commission En Banc delegate this function to an SEC officer?

COMMISSIONER GAITE:

Yes, Your Honor, we have delegated it to the General Counsel.

JUSTICE CARPIO:

It can be delegated. What cannot be delegated by the Commission En Banc to acommissioner or an individual employee of the Commission?

COMMISSIONER GAITE:

Novel opinions that [have] to be decided by the En Banc...

JUSTICE CARPIO:

What cannot be delegated, among others, is the power to adopt or amend rules andregulations, correct?

COMMISSIONER GAITE:

That’s correct, Your Honor.

JUSTICE CARPIO:

So, you combine the two (2), the SEC officer, if delegated that power, can issuean opinion but that opinion does not constitute a rule or regulation, correct?

COMMISSIONER GAITE:

Correct, Your Honor.

JUSTICE CARPIO:

So, all of these opinions that you mentioned they are not rules and regulations,correct?

COMMISSIONER GAITE:







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They are not rules and regulations.

JUSTICE CARPIO:

If they are not rules and regulations, they apply only to that particular situation andwill not constitute a precedent, correct?

COMMISSIONER GAITE:

Yes, Your Honor .14 (Emphasis supplied)

Significantly, the SEC en banc , which is the collegial body statutorily empowered to issue rules andopinions on behalf of the SEC, has adopted even the Grandfather Rule in determining compliancewith the 60-40 ownership requirement in favor of Filipino citizens mandated by the Constitution forcertain economic activities. This prevailing SEC ruling, which the SEC correctly adopted to thwartany circumvention of the required Filipino "ownership and control," is laid down in the 25 March2010 SEC en banc ruling in Redmont Consolidated Mines, Corp. v. McArthur Mining, Inc., et al.,15 towit:

The avowed purpose of the Constitution is to place in the hands of Filipinos the exploitation of ournatural resources. Necessarily, therefore, the Rule interpreting the constitutional provisionshould not diminish that right through the legal fiction of corporate ownership and control.But the constitutional provision, as interpreted and practiced via the 1967 SEC Rules, has favoredforeigners contrary to the command of the Constitution. Hence, the Grandf ather Rule mu st be

applied to accurately determine the actual participation , both dir ect and ind irect, of foreign ers

in a cor porat ion engaged in a national ized activ i ty or b usiness .

Compliance with the constitutional limitation(s) on engaging in nationalized activities must bedetermined by ascertaining if 60% of the investing corporation’s outstanding capital stock is ownedby "Filipino citizens", or as interpreted, by natural or individual Filipino citizens. If such investing

corporation is in turn owned to some extent by another investing corporation, the same process mustbe observed. One must not stop until the citizenships of the individual or natural stockholders oflayer after layer of investing corporations have been established, the very essence of theGrandfather Rule.

Lastly, it was the intent of the framers of the 1987 Constitution to adopt the GrandfatherRule. In one of the discussions on what is now Article XII of the present Constitution, the framersmade the following exchange:

MR. NOLLEDO. In Sections 3, 9 and 15, the Committee stated local or Filipino equity and foreignequity; namely, 60-40 in Section 3, 60-40 in Section 9, and 2/3-1/3 in Section 15.

MR. VILLEGAS. That is right.

MR. NOLLEDO. In teaching law, we are always faced with the question: ‘Where do we base theequity requirement, is it on the authorized capital stock, on the subscribed capital stock, or on thepaid-up capital stock of a corporation’? Will the Committee please enlighten me on this?

MR. VILLEGAS. We have just had a long discussion with the members of the team from the UP LawCenter who provided us a draft. The phrase that is contained here which we adopted from the UPdraft is ‘60 percent of voting stock.’











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MR. NOLLEDO. That must be based on the subscribed capital stock, because unless declareddelinquent, unpaid capital stock shall be entitled to vote.


MR. NOLLEDO. Thank you. With respect to an investment by one corporation in another

corporation, say, a corporation with 60-40 percent equity invests in another corporation which ispermitted by the Corporation Code, does the Committee adopt the grandfather rule?

MR. VILLEGAS. Yes, that is the understanding of the Committee.

MR. NOLLEDO. Therefore, we need additional Filipino capital?

MR. VILLEGAS. Yes. (Boldfacing and underscoring supplied; italicization in the original)

This SEC en banc ruling conforms to our 28 June 2011 Decision that the 60-40 ownershiprequirement in favor of Filipino citizens in the Constitution to engage in certain economic activitiesapplies not only to voting control of the corporation, but also to the beneficial ownership of the

corporation. Thus, in our 28 June 2011 Decision we stated:

Mere legal title is insufficient to meet the 60 percent Filipinoowned "capital" required in theConstitution. Full beneficial ownership of 60 percent of the outstanding capital stock, coupledwith 60 percent of the voting rights, is required . The legal and beneficial ownership of 60 percentof the outstanding capital stock must rest in the hands of Filipino nationals in accordance with theconstitutional mandate. Otherwise, the corporation is "considered as non-Philippine national[s]."(Emphasis supplied)

Both the Voting Control Test and the Beneficial Ownership Test must be applied to determinewhether a corporation is a "Philippine national."

The interpretation by legal officers of the SEC of the term "capital," embodied in various opinionswhich respondents relied upon, is merely preliminary and an opinion only of such officers. To repeat,any such opinion does not constitute an SEC rule or regulation. In fact, many of these opinionscontain a disclaimer which expressly states: "x x x the foregoing opinion is based solely on factsdisclosed in your query and relevant only to the particular issue raised therein and shall not beused in the nature of a standing rule binding upon the Commission in other cases whether ofsimilar or dissimilar circumstances."16 Thus, the opinions clearly make a caveat that they do notconstitute binding precedents on any one, not even on the SEC itself.

Likewise, the opinions of the SEC en banc , as well as of the DOJ, interpreting the law are neitherconclusive nor controlling and thus, do not bind the Court. It is hornbook doctrine that anyinterpretation of the law that administrative or quasi-judicial agencies make is only preliminary, neverconclusive on the Court. The power to make a final interpretation of the law, in this case the term"capital" in Section 11, Article XII of the 1987 Constitution, lies with this Court, not with any othergovernment entity.

In his motion for reconsideration, the PSE President cites the cases of National TelecommunicationsCommission v. Court of Appeal s17 and Philippine Long Distance Telephone Company v. NationalTelecommunications Commission18 in arguing that the Court has already defined the term "capital" inSection 11, Article XII of the 1987 Constitution.19



















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The PSE President is grossly mistaken. In both cases of National Telecommunications v. Court of Appeal s20 andPhilippine Long Distance Telephone Company v. National TelecommunicationsCommission,21 the Court did not define the term "capital" as found in Section 11, Article XII of the1987 Constitution. In fact, these two cases never mentioned, discussed or cited Section 11,Article XII of the Constitution or any of its economic provisions, and thus cannot serve asprecedent in the interpretation of Section 11, Article XII of the Constitution. These two cases

dealt solely with the determination of the correct regulatory fees under Section 40(e) and (f) of thePublic Service Act, to wit:

(e) For annual reimbursement of the expenses incurred by the Commission in the supervision ofother public services and/or in the regulation or fixing of their rates, twenty centavos for each onehundred pesos or fraction thereof, of the capital stock subscribed or paid, or if no shares havebeen issued, of the capital invested, or of the property and equipment whichever is higher.

(f) For the issue or increase of capital stock, twenty centavos for each one hundred pesos orfraction thereof, of the increased capital. (Emphasis supplied)

The Court’s interpretation in these two cases of the terms "capital stock subscribed or paid," "capital

stock" and "capital" does not pertain to, and cannot control, the definition of the term "capital" asused in Section 11, Article XII of the Constitution, or any of the economic provisions of theConstitution where the term "capital" is found. The definition of the term "capital" found in theConstitution must not be taken out of context. A careful reading of these two cases reveals that theterms "capital stock subscribed or paid," "capital stock" and "capital" were defined solely todetermine the basis for computing the supervision and regulation fees under Section 40(e) and (f) ofthe Public Service Act.

III.

Fi l ipinization of Public Uti l i t ies

The Preamble of the 1987 Constitution, as the prologue of the supreme law of the land, embodiesthe ideals that the Constitution intends to achieve.22 The Preamble reads:

We, the sovereign Filipino people, imploring the aid of Almighty God, in order to build a just andhumane society, and establish a Government that shall embody our ideals and aspirations, promotethe common good, conserve and develop our patrimony, and secure to ourselves and ourposterity, the blessings of independence and democracy under the rule of law and a regime of truth,

justice, freedom, love, equality, and peace, do ordain and promulgate this Constitution. (Emphasissupplied)

Consistent with these ideals, Section 19, Article II of the 1987 Constitution declares as State policythe development of a national economy "effect ively control led " by Filipinos:

Section 19. The State shall develop a self-reliant and independent national economy effectively

contro l led by Fil ip inos .

Fortifying the State policy of a Filipino-controlled economy, the Constitution decrees:

Section 10. The Congress shall, upon recommendation of the economic and planning agency, whenthe national interest dictates, reserve to citizens of the Philippines or to corporations or associationsat least sixty per centum of whose capital is owned by such citizens, or such higher percentage asCongress may prescribe, certain areas of investments. The Congress shall enact measures that willencourage the formation and operation of enterprises whose capital is wholly owned by Filipinos.















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In the grant of rights, privileges, and concessions covering the national economy and patrimony, theState shall give preference to qualified Filipinos.

The State shall regulate and exercise authority over foreign investments within its national jurisdiction and in accordance with its national goals and priorities.23

Under Section 10, Article XII of the 1987 Constitution, Congress may "reserve to citizens of thePhilippines or to corporations or associations at least sixty per centum of whose capital is owned bysuch citizens, or such higher percentage as Congress may prescribe, certain areas of investments."Thus, in numerous laws Congress has reserved certain areas of investments to Filipino citizens or tocorporations at least sixty percent of the "capital" of which is owned by Filipino citizens. Some ofthese laws are: (1) Regulation of Award of Government Contracts or R.A. No. 5183; (2) PhilippineInventors Incentives Act or R.A. No. 3850; (3) Magna Carta for Micro, Small and Medium Enterprisesor R.A. No. 6977; (4) Philippine Overseas Shipping Development Act or R.A. No. 7471; (5) DomesticShipping Development Act of 2004 or R.A. No. 9295; (6) Philippine Technology Transfer Act of 2009or R.A. No. 10055; and (7) Ship Mortgage Decree or P.D. No. 1521.

With respect to public utilities, the 1987 Constitution specifically ordains:

Section 11. No franchise, certificate, or any other form of authorization for the operation of apublic utility shall be granted except to citizens of the Philippines or to corporations orassociations organized under the laws of the Philippines, at least sixty per centum of whosecapital is owned by such citizens; nor shall such franchise, certificate, or authorization beexclusive in character or for a longer period than fifty years. Neither shall any such franchise or rightbe granted except under the condition that it shall be subject to amendment, alteration, or repeal bythe Congress when the common good so requires. The State shall encourage equity participation inpublic utilities by the general public. The participation of foreign investors in the governing body ofany public utility enterprise shall be limited to their proportionate share in its capital, and all theexecutive and managing officers of such corporation or association must be citizens of thePhilippines. (Emphasis supplied)

This provision, which mandates the Filipinization of public utilities, requires that any form ofauthorization for the operation of public utilities shall be granted only to "citizens of the Philippines orto corporations or associations organized under the laws of the Philippines at least sixty per centumof whose capital is owned by such citizens." "The provision is [an express] recognition of thesensitive and vital position of public utilities both in the national economy and for nationalsecurity."24

The 1987 Constitution reserves the ownership and operation of public utilities exclusively to (1)Filipino citizens, or (2) corporations or associations at least 60 percent of whose "capital" is ownedby Filipino citizens. Hence, in the case of individuals, only Filipino citizens can validly own andoperate a public utility. In the case of corporations or associations, at least 60 percent of their"capital" must be owned by Filipino citizens. In other words, under Section 11, Article XII of the

1987 Constitution, to own and operate a public utility a corporation’s capital must at least be60 percent owned by Phil ippin e nation als .

IV.

Defini tion of "Phil ip pine National"

Pursuant to the express mandate of Section 11, Article XII of the 1987 Constitution, Congressenacted Republic Act No. 7042 or the Foreign Investments Act of 1991 (FIA), as amended, whichdefined a "Philippine national" as follows:











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SEC. 3. Definitions. - As used in this Act:

a. The term "Philippine national" shall mean a citizen of the Philippines; or a domestic partnership orassociation wholly owned by citizens of the Philippines; or a corporation organized under the lawsof the Philippines of which at least sixty percent (60%) of the capital stock outstanding and

enti t led to vote is owned and held by citizens of the Philippines; or a corporation organized

abroad and registered as doing business in the Philippines under the Corporation Code of which onehundred percent (100%) of the capital stock outstanding and entitled to vote is wholly owned byFilipinos or a trustee of funds for pension or other employee retirement or separation benefits, wherethe trustee is a Philippine national and at least sixty percent (60%) of the fund will accrue to thebenefit of Philippine nationals: Provided , That where a corporation and its non-Filipino stockholdersown stocks in a Securities and Exchange Commission (SEC) registered enterprise, at least sixtypercent (60%) of the capital stock outstanding and entitled to vote of each of both corporations mustbe owned and held by citizens of the Philippines and at least sixty percent (60%) of the members ofthe Board of Directors of each of both corporations must be citizens of the Philippines, in order thatthe corporation, shall be considered a "Philippine national." (Boldfacing, italicization andunderscoring supplied)

Thus, the FIA clearly and unequivocally defines a "Philippine national" as a Philippine citizen, or adomestic corporation at least "60% of the capital stock outstanding and enti t led to vote " isowned by Philippine citizens.

The definition of a "Philippine national" in the FIA reiterated the meaning of such term as provided inits predecessor statute, Executive Order No. 226 or the Omnibus Investments Code of 1987 ,25 whichwas issued by then President Corazon C. Aquino. Article 15 of this Code states:

Article 15. "Philippine national" shall mean a citizen of the Philippines or a diplomatic partnership orassociation wholly-owned by citizens of the Philippines; or a corporation organized under the lawsof the Philippines of which at least sixty per cent (60%) of the capital stock outstanding and

enti t led to vote is owned and held by citizens of the Philippines; or a trustee of funds forpension or other employee retirement or separation benefits, where the trustee is a Philippine

national and at least sixty per cent (60%) of the fund will accrue to the benefit of Philippine nationals:Provided, That where a corporation and its non-Filipino stockholders own stock in a registeredenterprise, at least sixty per cent (60%) of the capital stock outstanding and entitled to vote of bothcorporations must be owned and held by the citizens of the Philippines and at least sixty per cent(60%) of the members of the Board of Directors of both corporations must be citizens of thePhilippines in order that the corporation shall be considered a Philippine national. (Boldfacing,italicization and underscoring supplied)

Under Article 48(3)26 of the Omnibus Investments Code of 1987, "no corporation x x x which is not a‘Philippine national’ x x x shall do business

x x x in the Philippines x x x without first securing from the Board of Investments a written certificate

to the effect that such business or economic activity x x x would not conflict with the Constitution orlaws of the Philippines."27Thus, a "non-Philippine national" cannot own and operate a reservedeconomic activity like a public utility. This means, of course, that only a "Philippine national" can ownand operate a public utility.

In turn, the definition of a "Philippine national" under Article 15 of the Omnibus Investments Code of1987 was a reiteration of the meaning of such term as provided in Article 14 of the OmnibusInvestments Code of 1981,28 to wit:


















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The FIA is the basic law governing foreign investments in the Philippines, irrespective of the natureof business and area of investment. The FIA spells out the procedures by which non-Philippinenationals can invest in the Philippines. Among the key features of this law is the concept of anegative list or the Foreign Investments Negative List.32 Section 8 of the law states:

SEC. 8. List of Investm ent Areas Reserved to Phil ippin e Nationals [Foreign Investment Negative

List]. - The Foreign Investment Negative List shall have two 2 component lists: A and B:

a. List A shall enumerate the areas of activi t ies reserved to Phil ipp ine nationals by mand ate

of the Consti tut ion and specific laws.

b. List B shall contain the areas of activities and enterprises regulated pursuant to law:

1. which are defense-related activities, requiring prior clearance and authorization from theDepartment of National Defense [DND] to engage in such activity, such as the manufacture, repair,storage and/or distribution of firearms, ammunition, lethal weapons, military ordinance, explosives,pyrotechnics and similar materials; unless such manufacturing or repair activity is specificallyauthorized, with a substantial export component, to a non-Philippine national by the Secretary of

National Defense; or

2. which have implications on public health and morals, such as the manufacture and distribution ofdangerous drugs; all forms of gambling; nightclubs, bars, beer houses, dance halls, sauna andsteam bathhouses and massage clinics. (Boldfacing, underscoring and italicization supplied)

Section 8 of the FIA enumerates the investment areas "reserved to Philippine nationals." ForeignInvestment Negative List A consists of "areas of activi t ies reserved to Phil ippine nationals bymandate of the Consti tut ion and speci f ic laws ," where foreign equity participation in anyenterprise shall be limited to the maximum percentage expressly prescribed by theConstitution and other specific laws. In short, to own and operate a public utility in thePhilippines one must be a "Philippine national" as defined in the FIA. The FIA is abundantnotice to foreign investors to what extent they can invest in public utilities in the Philippines.

To repeat, among the areas of investment covered by the Foreign Investment Negative List A is theownership and operation of public utilities, which the Constitution expressly reserves to Filipinocitizens and to corporations at least 60% owned by Filipino citizens. In other words, Negative ListA of the FIA reserves the ownership and operation of public utilities only to "Philippinenationals," defined in Section 3(a) of the FIA as "(1) a citizen of the Philippines; x x x or (3) acorporation organized under the laws of the Philippines of which at least sixty percent (60%)of the capital stock outstanding and enti t led to vote is owned and held by citizens of thePhilippines; or (4) a corporation organized abroad and registered as doing business in thePhilippines under the Corporation Code of which one hundred percent (100%) of the capital stockoutstanding and entitled to vote is wholly owned by Filipinos or a trustee of funds for pension orother employee retirement or separation benefits, where the trustee is a Philippine national and at

least sixty percent (60%) of the fund will accrue to the benefit of Philippine nationals."

Clearly, from the effectivity of the Investment Incentives Act of 1967 to the adoption of the OmnibusInvestments Code of 1981, to the enactment of the Omnibus Investments Code of 1987, and to thepassage of the present Foreign Investments Act of 1991, or for more than four decades, thestatutory definition of the term "Philippine national" has been uniform and consistent: itmeans a Filipino citizen, or a domestic corporation at least 60% of the voting stock is ownedby Filipinos. Likewise, these same statutes have uniformly and consistently required that











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only "Philippine nationals" could own and operate public utilities in the Philippines. Thefollowing exchange during the Oral Arguments is revealing:

JUSTICE CARPIO:

Counsel, I have some questions. You are aware of the Foreign Investments Act of

1991, x x x? And the FIA of 1991 took effect in 1991, correct? That’s over twenty (20)years ago, correct?

COMMISSIONER GAITE:


JUSTICE CARPIO:

And Section 8 of the Foreign Investments Act of 1991 states that []only Philippinenationals can own and operate public utilities[], correct?

COMMISSIONER GAITE:

Yes, Your Honor.

JUSTICE CARPIO:

And the same Foreign Investments Act of 1991 defines a "Philippine national" eitheras a citizen of the Philippines, or if it is a corporation at least sixty percent (60%) ofthe voting stock is owned by citizens of the Philippines, correct?

COMMISSIONER GAITE:


JUSTICE CARPIO:

And, you are also aware that under the predecessor law of the Foreign Investments Act of 1991, the Omnibus Investments Act of 1987, the same provisions apply: x x xonly Philippine nationals can own and operate a public utility and the Philippinenational, if it is a corporation, x x x sixty percent (60%) of the capital stock of thatcorporation must be owned by citizens of the Philippines, correct?

COMMISSIONER GAITE:


JUSTICE CARPIO:

And even prior to the Omnibus Investments Act of 1987, under the OmnibusInvestments Act of 1981, the same rules apply: x x x only a Philippine national canown and operate a public utility and a Philippine national, if it is a corporation, sixty



14

percent (60%) of its x x x voting stock, must be owned by citizens of the Philippines,correct?

COMMISSIONER GAITE:


JUSTICE CARPIO:

And even prior to that, under [the]1967 Investments Incentives Act and the ForeignCompany Act of 1968, the same rules applied, correct?

COMMISSIONER GAITE:


JUSTICE CARPIO:

So, for the last four (4) decades, x x x, the law has been very consistent – onlya Philippine national can own and operate a public utility, and a Philippinenational, if it is a corporation, x x x at least sixty percent (60%) of the votingstock must be owned by citizens of the Philippines, correct?

COMMISSIONER GAITE:

Correct, Your Honor .33 (Emphasis supplied)

Government agencies like the SEC cannot simply ignore Sections 3(a) and 8 of the FIA whichcategorically prescribe that certain economic activities, like the ownership and operation of publicutilities, are reserved to corporations "at least sixty percent (60%) of the capital stock

outstanding and enti t led to vote is owned and held by citizens of the Philippines." ForeignInvestment Negative List A refers to "activities reserved to Philippine nationals by mandate of theConstitution and specific laws." The FIA is the basic statute regulating foreign investments inthe Philippines. Government agencies tasked with regulating or monitoring foreign investments, aswell as counsels of foreign investors, should start with the FIA in determining to what extent aparticular foreign investment is allowed in the Philippines. Foreign investors and their counsels whoignore the FIA do so at their own peril. Foreign investors and their counsels who rely on opinions ofSEC legal officers that obviously contradict the FIA do so also at their own peril.

Occasional opinions of SEC legal officers that obviously contradict the FIA should immediately raisea red flag. There are already numerous opinions of SEC legal officers that cite the definition of a"Philippine national" in Section 3(a) of the FIA in determining whether a particular corporation is

qualified to own and operate a nationalized or partially nationalized business in the Philippines. Thisshows that SEC legal officers are not only aware of, but also rely on and invoke, the provisions ofthe FIA in ascertaining the eligibility of a corporation to engage in partially nationalized industries.The following are some of such opinions:

1. Opinion of 23 March 1993, addressed to Mr. Francis F. How;

2. Opinion of 14 April 1993, addressed to Director Angeles T. Wong of the PhilippineOverseas Employment Administration;







15

3. Opinion of 23 November 1993, addressed to Messrs. Dominador Almeda and Renato S.Calma;

4. Opinion of 7 December 1993, addressed to Roco Bunag Kapunan Migallos & Jardeleza;

5. SEC Opinion No. 49-04, addressed to Romulo Mabanta Buenaventura Sayoc & De Los

Angeles;

6. SEC-OGC Opinion No. 17-07, addressed to Mr. Reynaldo G. David; and

7. SEC-OGC Opinion No. 03-08, addressed to Attys. Ruby Rose J. Yusi and Rudyard S. Arbolado.

The SEC legal officers’ occasional but blatant disregard of the definition of the term "Philippinenational" in the FIA signifies their lack of integrity and competence in resolving issues on the 60-40ownership requirement in favor of Filipino citizens in Section 11, Article XII of the Constitution.

The PSE President argues that the term "Philippine national" defined in the FIA should be limited

and interpreted to refer to corporations seeking to avail of tax and fiscal incentives under investmentincentives laws and cannot be equated with the term "capital" in Section 11, Article XII of the 1987Constitution. Pangilinan similarly contends that the FIA and its predecessor statutes do not apply to"companies which have not registered and obtained special incentives under the schemesestablished by those laws."

Both are desperately grasping at straws. The FIA does not grant tax or fiscal incentives to anyenterprise. Tax and fiscal incentives to investments are granted separately under the OmnibusInvestments Code of 1987, not under the FIA. In fact, the FIA expressly repealed Articles 44 to 56 ofBook II of the Omnibus Investments Code of 1987, which articles previously regulated foreigninvestments in nationalized or partially nationalized industries.

The FIA is the applicable law regulating foreign investments in nationalized or partially nationalizedindustries. There is nothing in the FIA, or even in the Omnibus Investments Code of 1987 or itspredecessor statutes, that states, expressly or impliedly, that the FIA or its predecessor statutes donot apply to enterprises not availing of tax and fiscal incentives under the Code. The FIA and itspredecessor statutes apply to investments in all domestic enterprises, whether or not suchenterprises enjoy tax and fiscal incentives under the Omnibus Investments Code of 1987 or itspredecessor statutes. The reason is quite obvious – mere non-availment of tax and fiscalincentives by a non-Philippine national cannot exempt it from Section 11, Article XII of theConstitution regulating foreign investments in public utilities. In fact, the Board ofInvestments’ Primer on Investment Policies in the Philippines,34 which is given out to foreigninvestors, provides:

PART III. FOREIGN INVESTMENTS WITHOUT INCENTIVES

Investors who do not seek incentives and/or whose chosen activities do not qualify for incentives,(i.e., the activity is not listed in the IPP, and they are not exporting at least 70% of their production)may go ahead and make the investments without seeking incentives. They only have to be guidedby the Foreign Investments Negative List (FINL).

The FINL clearly defines investment areas requiring at least 60% Filipino ownership. All other areasoutside of this list are fully open to foreign investors. (Emphasis supplied)







16

V.

Right to elect di rectors, coupled w ith benefic ial ownership,

translates to effect ive control .

The 28 June 2011 Decision declares that the 60 percent Filipino ownership required by theConstitution to engage in certain economic activities applies not only to voting control of the

corporation, but also to the beneficial ownership of the corporation. To repeat, we held:

Mere legal title is insufficient to meet the 60 percent Filipino-owned "capital" required in theConstitution. Full beneficial ownership of 60 percent of the outstanding capital stock, coupledwith 60 percent of the voting rights, is required . The legal and beneficial ownership of 60 percentof the outstanding capital stock must rest in the hands of Filipino nationals in accordance with theconstitutional mandate. Otherwise, the corporation is "considered as non-Philippine national[s]."(Emphasis supplied)

This is consistent with Section 3 of the FIA which provides that where 100% of the capital stock isheld by "a trustee of funds for pension or other employee retirement or separation benefits," thetrustee is a Philippine national if "at least sixty percent (60%) of the fund will accrue to the benefit of

Philippine nationals." Likewise, Section 1(b) of the Implementing Rules of the FIA provides that "forstocks to be deemed owned and held by Philippine citizens or Philippine nationals, mere legal title isnot enough to meet the required Filipino equity. Full beneficial ownership of the stocks, coupledwith appropriate voting rights, is essential."

Since the constitutional requirement of at least 60 percent Filipino ownership applies not only tovoting control of the corporation but also to the beneficial ownership of the corporation, it is thereforeimperative that such requirement apply uniformly and across the board to all classes of shares,regardless of nomenclature and category, comprising the capital of a corporation. Under theCorporation Code, capital stock35 consists of all classes of shares issued to stockholders, that is,common shares as well as preferred shares, which may have different rights, privileges orrestrictions as stated in the articles of incorporation.36

The Corporation Code allows denial of the right to vote to preferred and redeemable shares, butdisallows denial of the right to vote in specific corporate matters. Thus, common shares have theright to vote in the election of directors, while preferred shares may be denied such right.Nonetheless, preferred shares, even if denied the right to vote in the election of directors, areentitled to vote on the following corporate matters: (1) amendment of articles of incorporation; (2)increase and decrease of capital stock; (3) incurring, creating or increasing bonded indebtedness;(4) sale, lease, mortgage or other disposition of substantially all corporate assets; (5) investment offunds in another business or corporation or for a purpose other than the primary purpose for whichthe corporation was organized; (6) adoption, amendment and repeal of by-laws; (7) merger andconsolidation; and (8) dissolution of corporation.37

Since a specific class of shares may have rights and privileges or restrictions different from the rest

of the shares in a corporation, the 60-40 ownership requirement in favor of Filipino citizens inSection 11, Article XII of the Constitution must apply not only to shares with voting rights but also toshares without voting rights. Preferred shares, denied the right to vote in the election of directors, areanyway still entitled to vote on the eight specific corporate matters mentioned above. Thus, if acorporation, engaged in a partially nationalized industry, issues a mixture of common andpreferred non-voting shares, at least 60 percent of the common shares and at least 60percent of the preferred non-voting shares must be owned by Filipinos. Of course, if acorporation issues only a single class of shares, at least 60 percent of such shares must necessarilybe owned by Filipinos. In short, the 60-40 ownership requirement in favor of Filipino citizens














17

must apply separately to each class of shares, whether common, preferred non-voting,preferred voting or any other class of shares. This uniform application of the 60-40 ownershiprequirement in favor of Filipino citizens clearly breathes life to the constitutional command that theownership and operation of public utilities shall be reserved exclusively to corporations at least 60percent of whose capital is Filipino-owned. Applying uniformly the 60-40 ownership requirement infavor of Filipino citizens to each class of shares, regardless of differences in voting rights, privileges

and restrictions, guarantees effective Filipino control of public utilities, as mandated by theConstitution.

Moreover, such uniform application to each class of shares insures that the "controlling interest" inpublic utilities always lies in the hands of Filipino citizens. This addresses and extinguishesPangilinan’s worry that foreigners, owning most of the non-voting shares, will exercise greatercontrol over fundamental corporate matters requiring two-thirds or majority vote of all shareholders.

VI.

Intent of th e framers of the Consti tut ion

While Justice Velasco quoted in his Dissenting Opinion38 a portion of the deliberations of the

Constitutional Commission to support his claim that the term "capital" refers to the total outstandingshares of stock, whether voting or non-voting, the following excerpts of the deliberations revealotherwise. It is clear from the following exchange that the term "capital" refers to controllinginterest of a corporation, thus:

MR. NOLLEDO. In Sections 3, 9 and 15, the Committee stated local or Filipino equity and foreignequity; namely, 60-40 in Section 3, 60-40 in Section 9 and 2/3-1/3 in Section 15.


MR. NOLLEDO. In teaching law, we are always faced with this question: "Where do we base theequity requirement, is it on the authorized capital stock, on the subscribed capital stock, or on thepaid-up capital stock of a corporation"? Will the Committee please enlighten me on this?

MR. VILLEGAS. We have just had a long discussion with the members of the team from the UP LawCenter who provided us a draft. The phrase that is contained here which we adopted from theUP draft is "60 percent of voting stock."

MR. NOLLEDO. That must be based on the subscribed capital stock, because unless declareddelinquent, unpaid capital stock shall be entitled to vote.


MR. NOLLEDO. Thank you.

With respect to an investment by one corporation in another corporation, say, a corporation with 60-40 percent equity invests in another corporation which is permitted by the Corporation Code, doesthe Committee adopt the grandfather rule?

MR. VILLEGAS. Yes, that is the understanding of the Committee.

MR. NOLLEDO. Therefore, we need additional Filipino capital?






18

MR. VILLEGAS. Yes.39

x x x x

MR. AZCUNA. May I be clarified as to that portion that was accepted by the Committee.

MR. VILLEGAS. The portion accepted by the Committee is the deletion of the phrase "voting stockor controlling interest."

MR. AZCUNA. Hence, without the Davide amendment, the committee report would read:"corporations or associations at least sixty percent of whose CAPITAL is owned by such citizens."

MR. VILLEGAS. Yes.

MR. AZCUNA. So if the Davide amendment is lost, we are stuck with 60 percent of the capital to beowned by citizens.


MR. AZCUNA. But the control can be with the foreigners even if they are the minority. Let ussay 40 percent of the capital is owned by them, but it is the voting capital, whereas, theFilipinos own the nonvoting shares. So we can have a situation where the corporation iscontrolled by foreigners despite being the minority because they have the voting capital. Thatis the anomaly that would result here.

MR. BENGZON. No, the reason we eliminated the word "stock" as stated in the 1973 and 1935Constitutions is that according to Commissioner Rodrigo, there are associations that do nothave stocks. That is why we say "CAPITAL."

MR. AZCUNA. We should not eliminate the phrase "controlling interest."

MR. BENGZON. In the case of stock corporations, it is assumed.40 (Boldfacing and underscoringsupplied)

Thus, 60 percent of the "capital" assumes, or should result in, a "controlling interest" in thecorporation.

The use of the term "capital" was intended to replace the word "stock" because associations withoutstocks can operate public utilities as long as they meet the 60-40 ownership requirement in favor ofFilipino citizens prescribed in Section 11, Article XII of the Constitution. However, this did not changethe intent of the framers of the Constitution to reserve exclusively to Philippine nationals the"controlling interest" in public utilities.

During the drafting of the 1935 Constitution, economic protectionism was "the battle-cry of thenationalists in the Convention."41 The same battle-cry resulted in the nationalization of the publicutilities.42 This is also the same intent of the framers of the 1987 Constitution who adopted the exactformulation embodied in the 1935 and 1973 Constitutions on foreign equity limitations in partiallynationalized industries.

The OSG, in its own behalf and as counsel for the State,43 agrees fully with the Court’s interpretationof the term "capital." In its Consolidated Comment, the OSG explains that the deletion of the phrase























19

"controlling interest" and replacement of the word "stock" with the term "capital" were intendedspecifically to extend the scope of the entities qualified to operate public utilities to includeassociations without stocks. The framers’ omission of the phrase "controlling interest" did not meanthe inclusion of all shares of stock, whether voting or non-voting. The OSG reiterated essentially theCourt’s declaration that the Constitution reserved exclusively to Philippine nationals the ownershipand operation of public utilities consistent with the State’s policy to "develop a self -reliant and

independent national economy effect ively con trol led by Fil ip inos ."

As we held in our 28 June 2011 Decision, to construe broadly the term "capital" as the totaloutstanding capital stock, treated as a single class regardless of the actual classification of shares,grossly contravenes the intent and letter of the Constitution that the "State shall develop a self-reliantand independent national economyeffect ively control led by Filipinos." We illustrated the glaringanomaly which would result in defining the term "capital" as the total outstanding capital stock of acorporation, treated as a single class of shares regardless of the actual classification of shares, towit:

Let us assume that a corporation has 100 common shares owned by foreigners and 1,000,000 non-voting preferred shares owned by Filipinos, with both classes of share having a par value of onepeso (P 1.00) per share. Under the broad definition of the term "capital," such corporation would beconsidered compliant with the 40 percent constitutional limit on foreign equity of public utilities sincethe overwhelming majority, or more than 99.999 percent, of the total outstanding capital stock isFilipino owned. This is obviously absurd.

In the example given, only the foreigners holding the common shares have voting rights in theelection of directors, even if they hold only 100 shares. The foreigners, with a minuscule equity ofless than 0.001 percent, exercise control over the public utility. On the other hand, the Filipinos,holding more than 99.999 percent of the equity, cannot vote in the election of directors and hence,have no control over the public utility. This starkly circumvents the intent of the framers of theConstitution, as well as the clear language of the Constitution, to place the control of public utilities inthe hands of Filipinos. x x x

Further, even if foreigners who own more than forty percent of the voting shares elect an all-Filipinoboard of directors, this situation does not guarantee Filipino control and does not in any way cure theviolation of the Constitution. The independence of the Filipino board members so elected by suchforeign shareholders is highly doubtful. As the OSG pointed out, quoting Justice GeorgeSutherland’s words in Humphrey’s Executor v. US,44 "x x x it is quite evident that one who holds hisoffice only during the pleasure of another cannot be depended upon to maintain an attitude ofindependence against the latter’s will." Allowing foreign shareholders to elect a controlling majority ofthe board, even if all the directors are Filipinos, grossly circumvents the letter and intent of theConstitution and defeats the very purpose of our nationalization laws.

VII.

Last sentenc e of Section 11, Article XII of the Const i tution

The last sentence of Section 11, Article XII of the 1987 Constitution reads:

The participation of foreign investors in the governing body of any public utility enterprise shall belimited to their proportionate share in its capital, and all the executive and managing officers of suchcorporation or association must be citizens of the Philippines.

During the Oral Arguments, the OSG emphasized that there was never a question on the intent ofthe framers of the Constitution to limit foreign ownership, and assure majority Filipino ownership and







20

control of public utilities. The OSG argued, "while the delegates disagreed as to the percentagethreshold to adopt, x x x the records show they clearly understood that Filipino control of the publicutility corporation can only be and is obtained only through the election of a majority of the membersof the board."

Indeed, the only point of contention during the deliberations of the Constitutional Commission on 23

August 1986 was the extent of majority Filipino control of public utilities. This is evident from thefollowing exchange:

THE PRESIDENT. Commissioner Jamir is recognized.

MR. JAMIR. Madam President, my proposed amendment on lines 20 and 21 is to delete the phrase"two thirds of whose voting stock or controlling interest," and instead substitute the words "SIXTYPERCENT OF WHOSE CAPITAL" so that the sentence will read: "No franchise, certificate, or anyother form of authorization for the operation of a public utility shall be granted except to citizens ofthe Philippines or to corporations or associations organized under the laws of the Philippines at leastSIXTY PERCENT OF WHOSE CAPITAL is owned by such citizens."

x x x x

THE PRESIDENT: Will Commissioner Jamir first explain?

MR. JAMIR. Yes, in this Article on National Economy and Patrimony, there were two previoussections in which we fixed the Filipino equity to 60 percent as against 40 percent for foreigners. It isonly in this Section 15 with respect to public utilities that the committee proposal was increased totwo-thirds. I think it would be better to harmonize this provision by providing that even in the case ofpublic utilities, the minimum equity for Filipino citizens should be 60 percent.

MR. ROMULO. Madam President.

THE PRESIDENT. Commissioner Romulo is recognized.

MR. ROMULO. My reason for supporting the amendment is based on the discussions I have hadwith representatives of the Filipino majority owners of the international record carriers, and thesubsequent memoranda they submitted to me. x x x

Their second point is that under the Corporation Code, the management and control of a corporationis vested in the board of directors, not in the officers but in the board of directors. The officers areonly agents of the board. And they believe that with 60 percent of the equity, the Filipino majoritystockholders undeniably control the board. Only on important corporate acts can the 40-percentforeign equity exercise a veto, x x x.

x x x x45

MS. ROSARIO BRAID. Madam President.

THE PRESIDENT. Commissioner Rosario Braid is recognized.

MS. ROSARIO BRAID. Yes, in the interest of equal time, may I also read from a memorandum bythe spokesman of the Philippine Chamber of Communications on why they would like to maintain the







21

present equity, I am referring to the 66 2/3. They would prefer to have a 75-25 ratio but would settlefor 66 2/3. x x x

x x x x

THE PRESIDENT. Just to clarify, would Commissioner Rosario Braid support the proposal of two-

thirds rather than the 60 percent?

MS. ROSARIO BRAID. I have added a clause that will put management in the hands of Filipinocitizens.

x x x x46

While they had differing views on the percentage of Filipino ownership of capital, it is clear that theframers of the Constitution intended public utilities to be majori ty Filipino-owned and controlled. Toensure that Filipinos control public utilities, the framers of the Constitution approved, as additionalsafeguard, the inclusion of the last sentence of Section 11, Article XII of the Constitutioncommanding that "[t]he participation of foreign investors in the governing body of any public utility

enterprise shall be limited to their proportionate share in its capital, and all the executive andmanaging officers of such corporation or association must be citizens of the Philippines." In otherwords, the last sentence of Section 11, Article XII of the Constitution mandates that (1) theparticipation of foreign investors in the governing body of the corporation or association shall belimited to their proportionate share in the capital of such entity; and (2) all officers of the corporationor association must be Filipino citizens.

Commissioner Rosario Braid proposed the inclusion of the phrase requiring the managing officers ofthe corporation or association to be Filipino citizens specifically to prevent management contracts,which were designed primarily to circumvent the Filipinization of public utilities, and to assure Filipinocontrol of public utilities, thus:

MS. ROSARIO BRAID. x x x They also like to suggest that we amend this provision by adding aphrase which states: "THE MANAGEMENT BODY OF EVERY CORPORATION OR ASSOCIATIONSHALL IN ALL CASES BE CONTROLLED BY CITIZENS OF THE PHILIPPINES." I have with metheir position paper.

THE PRESIDENT. The Commissioner may proceed.

MS. ROSARIO BRAID. The three major international record carriers in the Philippines, whichCommissioner Romulo mentioned – Philippine Global Communications, EasternTelecommunications, Globe Mackay Cable – are 40-percent owned by foreign multinationalcompanies and 60-percent owned by their respective Filipino partners. All three, however, also havemanagement contracts with these foreign companies – Philcom with RCA, ETPI with Cable andWireless PLC, and GMCR with ITT. Up to the present time, the general managers of these carriers

are foreigners. While the foreigners in these common carriers are only minority owners, the foreignmultinationals are the ones managing and controlling their operations by virtue of their managementcontracts and by virtue of their strength in the governing bodies of these carriers.47

x x x x

MR. OPLE. I think a number of us have agreed to ask Commissioner Rosario Braid to propose anamendment with respect to the operating management of public utilities, and in this amendment, we











22

are associated with Fr. Bernas, Commissioners Nieva and Rodrigo. Commissioner Rosario Braid willstate this amendment now.

Thank you.

MS. ROSARIO BRAID. Madam President.

THE PRESIDENT. This is still on Section 15.

MS. ROSARIO BRAID. Yes.

MR. VILLEGAS. Yes, Madam President.

x x x x

MS. ROSARIO BRAID. Madam President, I propose a new section to read: ‘THE MANAGEMENTBODY OF EVERY CORPORATION OR ASSOCIATION SHALL IN ALL CASES BE CONTROLLEDBY CITIZENS OF THE PHILIPPINES."

This will prevent management contracts and assure control by Filipino citizens. Will thecommittee assure us that this amendment will insure that past activities such as managementcontracts will no longer be possible under this amendment?

x x x x

FR. BERNAS. Madam President.

THE PRESIDENT. Commissioner Bernas is recognized.

FR. BERNAS. Will the committee accept a reformulation of the first part?

MR. BENGZON. Let us hear it.

FR. BERNAS. The reformulation will be essentially the formula of the 1973 Constitution which reads:"THE PARTICIPATION OF FOREIGN INVESTORS IN THE GOVERNING BODY OF ANY PUBLICUTILITY ENTERPRISE SHALL BE LIMITED TO THEIR PROPORTIONATE SHARE IN THECAPITAL THEREOF AND..."

MR. VILLEGAS. "ALL THE EXECUTIVE AND MANAGING OFFICERS OF SUCH CORPORATIONS AND ASSOCIATIONS MUST BE CITIZENS OF THE PHILIPPINES."

MR. BENGZON. Will Commissioner Bernas read the whole thing again?

FR. BERNAS. "THE PARTICIPATION OF FOREIGN INVESTORS IN THE GOVERNING BODY OF ANY PUBLIC UTILITY ENTERPRISE SHALL BE LIMITED TO THEIR PROPORTIONATE SHAREIN THE CAPITAL THEREOF..." I do not have the rest of the copy.

MR. BENGZON. "AND ALL THE EXECUTIVE AND MANAGING OFFICERS OF SUCHCORPORATIONS OR ASSOCIATIONS MUST BE CITIZENS OF THE PHILIPPINES." Is thatcorrect?



23

MR. VILLEGAS. Yes.

MR. BENGZON. Madam President, I think that was said in a more elegant language. We accept theamendment. Is that all right with Commissioner Rosario Braid?

MS. ROSARIO BRAID. Yes.

x x x x

MR. DE LOS REYES. The governing body refers to the board of directors and trustees.


MR. BENGZON. Yes, the governing body refers to the board of directors.

MR. REGALADO. It is accepted.

MR. RAMA. The body is now ready to vote, Madam President.

VOTING

x x x x

The results show 29 votes in favor and none against; so the proposed amendment is approved.

x x x x

THE PRESIDENT. All right. Can we proceed now to vote on Section 15?

MR. RAMA. Yes, Madam President.

THE PRESIDENT. Will the chairman of the committee please read Section 15?

MR. VILLEGAS. The entire Section 15, as amended, reads: "No franchise, certificate, or any otherform of authorization for the operation of a public utility shall be granted except to citizens of thePhilippines or to corporations or associations organized under the laws of the Philippines at least 60PERCENT OF WHOSE CAPITAL is owned by such citizens." May I request Commissioner Bengzonto please continue reading.

MR. BENGZON. "THE PARTICIPATION OF FOREIGN INVESTORS IN THE GOVERNING BODYOF ANY PUBLIC UTILITY ENTERPRISE SHALL BE LIMITED TO THEIR PROPORTIONATE

SHARE IN THE CAPITAL THEREOF AND ALL THE EXECUTIVE AND MANAGING OFFICERS OFSUCH CORPORATIONS OR ASSOCIATIONS MUST BE CITIZENS OF THE PHILIPPINES."

MR. VILLEGAS. "NOR SHALL SUCH FRANCHISE, CERTIFICATE OR AUTHORIZATION BEEXCLUSIVE IN CHARACTER OR FOR A PERIOD LONGER THAN TWENTY-FIVE YEARSRENEWABLE FOR NOT MORE THAN TWENTY-FIVE YEARS. Neither shall any such franchise orright be granted except under the condition that it shall be subject to amendment, alteration, orrepeal by Congress when the common good so requires. The State shall encourage equityparticipation in public utilities by the general public."



24

VOTING

x x x x

The results show 29 votes in favor and 4 against; Section 15, as amended, is approved.48 (Emphasissupplied)

The last sentence of Section 11, Article XII of the 1987 Constitution, particularly the provision on thelimited participation of foreign investors in the governing body of public utilities, is a reiteration of thelast sentence of Section 5, Article XIV of the 1973 Constitution,49 signifying its importance inreserving ownership and control of public utilities to Filipino citizens.

VIII.

The undisputed facts

There is no dispute, and respondents do not claim the contrary, that (1) foreigners own 64.27% ofthe common shares of PLDT, which class of shares exercises the sole right to vote in the election ofdirectors, and thus foreigners control PLDT; (2) Filipinos own only 35.73% of PLDT’s common

shares, constituting a minority of the voting stock, and thus Filipinos do not control PLDT; (3)preferred shares, 99.44% owned by Filipinos, have no voting rights; (4) preferred shares earn only1/70 of the dividends that common shares earn;50 (5) preferred shares have twice the par value ofcommon shares; and (6) preferred shares constitute 77.85% of the authorized capital stock of PLDTand common shares only 22.15%.

Despite the foregoing facts, the Court did not decide, and in fact refrained from ruling on thequestion of whether PLDT violated the 60-40 ownership requirement in favor of Filipino citizens inSection 11, Article XII of the 1987 Constitution. Such question indisputably calls for a presentationand determination of evidence through a hearing, which is generally outside the province of theCourt’s jurisdiction, but well within the SEC’s statutory powers. Thus, for obvious reasons, the Courtlimited its decision on the purely legal and threshold issue on the definition of the term "capital" inSection 11, Article XII of the Constitution and directed the SEC to apply such definition indetermining the exact percentage of foreign ownership in PLDT.

IX.

PLDT is not an in dispensable party;

SEC is impleaded in this c ase.

In his petition, Gamboa prays, among others:

x x x x

5. For the Honorable Court to issue a declaratory relief that ownership of common or voting shares isthe sole basis in determining foreign equity in a public utility and that any other government rulings,opinions, and regulations inconsistent with this declaratory relief be declared unconstitutional and aviolation of the intent and spirit of the 1987 Constitution;

6. For the Honorable Court to declare null and void all sales of common stocks to foreigners inexcess of 40 percent of the total subscribed common shareholdings; and















25

7. For the Honorable Court to direct the Securities and Exchange Commission and PhilippineStock Exchange to require PLDT to make a public disclosure of all of its foreign shareholdingsand their actual and real beneficial owners.

Other relief(s) just and equitable are likewise prayed for. (Emphasis supplied)

As can be gleaned from his prayer, Gamboa clearly asks this Court to compel the SEC to perform itsstatutory duty to investigate whether "the required percentage of ownership of the capital stock to beowned by citizens of the Philippines has been complied with [by PLDT] as required by x x x theConstitution."51 Such plea clearly negates SEC’s argument that it was not impleaded.

Granting that only the SEC Chairman was impleaded in this case, the Court has ample powers toorder the SEC’s compliance with its directive contained in the 28 June 2011 Decision in view of thefar-reaching implications of this case. In Domingo v. Scheer ,52 the Court dispensed with theamendment of the pleadings to implead the Bureau of Customs considering (1) the unique backdropof the case; (2) the utmost need to avoid further delays; and (3) the issue of public interest involved.The Court held:

The Court may be curing the defect in this case by adding the BOC as party-petitioner. The petitionshould not be dismissed because the second action would only be a repetition of the first.In Salvador, et al., v. Court of Appeals, et al., we held that this Court has full powers, apart from thatpower and authority which is inherent, to amend the processes, pleadings, proceedings anddecisions by substituting as party-plaintiff the real party-in-interest. The Court has the power toavoid delay in the disposition of this case, to order its amendment as to implead the BOC asparty-respondent. Indeed, it may no longer be necessary to do so taking into account theunique backdrop in this case, involving as it does an issue of public interest. After all, theOffice of the Solicitor General has represented the petitioner in the instant proceedings, as well as inthe appellate court, and maintained the validity of the deportation order and of the BOC’s OmnibusResolution. It cannot, thus, be claimed by the State that the BOC was not afforded its day in court,simply because only the petitioner, the Chairperson of the BOC, was the respondent in the CA, andthe petitioner in the instant recourse. In Alonso v. Villamor, we had the occasion to state:

There is nothing sacred about processes or pleadings, their forms or contents. Their solepurpose is to facilitate the application of justice to the rival claims of contending parties. Theywere created, not to hinder and delay, but to facilitate and promote, the administration of justice.They do not constitute the thing itself, which courts are always striving to secure to litigants. Theyare designed as the means best adapted to obtain that thing. In other words, they are a means to anend. When they lose the character of the one and become the other, the administration of justice isat fault and courts are correspondingly remiss in the performance of their obvious duty.53 (Emphasissupplied)

In any event, the SEC has expressly manifested54 that it will abide by the Court’s decision anddefer to the Court’s definition of the term "capital" in Section 11, Article XII of the

Constitution. Further, the SEC entered its special appearance in this case and argued duringthe Oral Arguments, indicating its submission to the Court’s jurisdiction. It is clear, therefore,that there exists no legal impediment against the proper and immediate implementation of theCourt’s directive to the SEC.

PLDT is an indispensable party only insofar as the other issues, particularly the factual questions,are concerned. In other words, PLDT must be impleaded in order to fully resolve the issues on (1)whether the sale of 111,415 PTIC shares to First Pacific violates the constitutional limit on foreignownership of PLDT; (2) whether the sale of common shares to foreigners exceeded the 40 percent


















26

limit on foreign equity in PLDT; and (3) whether the total percentage of the PLDT common shareswith voting rights complies with the 60-40 ownership requirement in favor of Filipino citizens underthe Constitution for the ownership and operation of PLDT. These issues indisputably call for anexamination of the parties’ respective evidence, and thus are clearly within the jurisdiction of theSEC. In short, PLDT must be impleaded, and must necessarily be heard, in the proceedings beforethe SEC where the factual issues will be thoroughly threshed out and resolved.

Notably, the foregoing issues were left untouched by the Court . The Court did not rule on thefactual issues raised by Gamboa, except the single and purely legal issue on the definition of theterm "capital" in Section 11, Article XII of the Constitution. The Court confined the resolution of theinstant case to this threshold legal issue in deference to the fact-finding power of the SEC.

Needless to state, the Court can validly, properly, and fully dispose of the fundamental legal issue inthis case even without the participation of PLDT since defining the term "capital" in Section 11,

Article XII of the Constitution does not, in any way, depend on whether PLDT was impleaded. Simplyput, PLDT is not indispensable for a complete resolution of the purely legal question in this case.55 Infact, the Court, by treating the petition as one for mandamus,56 merely directed the SEC to apply theCourt’s definition of the term "capital" in Section 11, Article XII of the Constitution in determiningwhether PLDT committed any violation of the said constitutional provision. The dispositive portionof the Court’s ruling is addressed not to PLDT but solely to the SEC, which is theadministrative agency tasked to enforce the 60-40 ownership requirement in favor of Filipinocitizens in Section 11, Article XII of the Constitution.

Since the Court limited its resolution on the purely legal issue on the definition of the term "capital" inSection 11, Article XII of the 1987 Constitution, and directed the SEC to investigate any violation byPLDT of the 60-40 ownership requirement in favor of Filipino citizens under the Constitution,57 thereis no deprivation of PLDT’s property or denial of PLDT’s right to due process, contrary to Pangilinanand Nazareno’s misimpression. Due process will be afforded to PLDT when it presents proof to theSEC that it complies, as it claims here, with Section 11, Article XII of the Constitution.

X.

Foreign Investm ents in the Phil ippines

Movants fear that the 28 June 2011 Decision would spell disaster to our economy, as it may result ina sudden flight of existing foreign investors to "friendlier" countries and simultaneously deterring newforeign investors to our country. In particular, the PSE claims that the 28 June 2011 Decision mayresult in the following: (1) loss of more than P 630 billion in foreign investments in PSE-listed shares;(2) massive decrease in foreign trading transactions; (3) lower PSE Composite Index; and (4) localinvestors not investing in PSE-listed shares.58

Dr. Bernardo M. Villegas, one of the amici curiae in the Oral Arguments, shared movants’apprehension. Without providing specific details, he pointed out the depressing state of thePhilippine economy compared to our neighboring countries which boast of growing economies.

Further, Dr. Villegas explained that the solution to our economic woes is for the government to "take-over" strategic industries, such as the public utilities sector, thus:

JUSTICE CARPIO:

I would like also to get from you Dr. Villegas if you have additional information on whether this highFDI59 countries in East Asia have allowed foreigners x x x control [of] their public utilities, so that wecan compare apples with apples.























27

DR. VILLEGAS:

Correct, but let me just make a comment. When these neighbors of ours find an industry strategic,their solution is not to "Filipinize" or "Vietnamize" or "Singaporize." Their solution is to make surethat those industries are in the hands of state enterprises. So, in these countries,nationalization means the government takes over. And because their governments are

competent and honest enough to the public, that is the solution. x x x 60 (Emphasis supplied)

If government ownership of public utilities is the solution, then foreign investments in our publicutilities serve no purpose. Obviously, there can never be foreign investments in public utilities if, asDr. Villegas claims, the "solution is to make sure that those industries are in the hands of stateenterprises." Dr. Villegas’s argument that foreign investments in telecommunication companies likePLDT are badly needed to save our ailing economy contradicts his own theory that the solution is forgovernment to take over these companies. Dr. Villegas is barking up the wrong tree since Stateownership of public utilities and foreign investments in such industries are diametrically opposedconcepts, which cannot possibly be reconciled.

In any event, the experience of our neighboring countries cannot be used as argument to decide the

present case differently for two reasons. First, the governments of our neighboring countries have,as claimed by Dr. Villegas, taken over ownership and control of their strategic public utilities like thetelecommunications industry. Second, our Constitution has specific provisions limiting foreignownership in public utilities which the Court is sworn to uphold regardless of the experience of ourneighboring countries.

In our jurisdiction, the Constitution expressly reserves the ownership and operation of public utilitiesto Filipino citizens, or corporations or associations at least 60 percent of whose capital belongs toFilipinos. Following Dr. Villegas’s claim, the Philippines appears to be more liberal in allowing foreigninvestors to own 40 percent of public utilities, unlike in other Asian countries whose governmentsown and operate such industries.

XI.

Prospective Appl icat ion of Sanctions

In its Motion for Partial Reconsideration, the SEC sought to clarify the reckoning period of theapplication and imposition of appropriate sanctions against PLDT if found violating Section 11,

Article XII of the Constitution.1avvphi1

As discussed, the Court has directed the SEC to investigate and determine whether PLDT violatedSection 11, Article XII of the Constitution. Thus, there is no dispute that it is only after the SEC hasdetermined PLDT’s violation, if any exists at the time of the commencement of the administrativecase or investigation, that the SEC may impose the statutory sanctions against PLDT. In otherwords, once the 28 June 2011 Decision becomes final, the SEC shall impose the appropriatesanctions only if it finds after due hearing that, at the start of the administrative case or investigation,

there is an existing violation of Section 11, Article XII of the Constitution. Under prevailing jurisprudence, public utilities that fail to comply with the nationality requirement under Section 11, Article XII and the FIA can cure their deficiencies prior to the start of the administrative case orinvestigation.61

XII.

Final Word











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The Constitution expressly declares as State policy the development of an economy "effectivelycontrol led " by Filipinos. Consistent with such State policy, the Constitution explicitly reserves theownership and operation of public utilities to Philippine nationals, who are defined in the ForeignInvestments Act of 1991 as Filipino citizens, or corporations or associations at least 60 percent ofwhose capital wi th vot ing r ights belongs to Filipinos. The FIA’s implementing rules explain that"[f]or stocks to be deemed owned and held by Philippine citizens or Philippine nationals, mere legal

title is not enough to meet the required Filipino equity. Full beneficial ownership of the stocks,coupled with appropriate voting rights is essential." In effect, the FIA clarifies, reiterates andconfirms the interpretation that the term "capital" in Section 11, Article XII of the 1987 Constitutionrefers to shares wi th votin g rights, as w ell as w i th ful l benefic ial own ership . This is preciselybecause the right to vote in the election of directors, coupled with full beneficial ownership of stocks,translates to effective control of a corporation.

Any other construction of the term "capital" in Section 11, Article XII of the Constitution contravenesthe letter and intent of the Constitution. Any other meaning of the term "capital" openly invites aliendomination of economic activities reserved exclusively to Philippine nationals. Therefore,respondents’ interpretation will ultimately result in handing over effective control of our nationaleconomy to foreigners in patent violation of the Constitution, making Filipinos second-class citizensin their own country.

Filipinos have only to remind themselves of how this country was exploited under the Parity Amendment, which gave Americans the same rights as Filipinos in the exploitation of naturalresources, and in the ownership and control of public utilities, in the Philippines. To do this the 1935Constitution, which contained the same 60 percent Filipino ownership and control requirement as thepresent 1987 Constitution, had to be amended to give Americans parity rights with Filipinos. Therewas bitter opposition to the Parity Amendment62 and many Filipinos eagerly awaited its expiration. Inlate 1968, PLDT was one of the American-controlled public utilities that became Filipino-controlledwhen the controlling American stockholders divested in anticipation of the expiration of the Parity

Amendment on 3 July 1974.63 No economic suicide happened when control of public utilities andmining corporations passed to Filipinos’ hands upon expiration of the Parity Amendment.

Movants’ interpretation of the term "capital" would bring us back to the same evils spawned by theParity Amendment, effect ively giving for eigners pari ty rights wi th Fi l ip inos, but this t ime even

withou t any amendment to the present Consti tut ion . Worse, movants’ interpretation opens upour national economy toeffect ive co ntrol not only by Americans but also by all foreigners, be theyIndonesians, Malaysians or Chinese, even in the absence of reciprocal treaty arrangements .

At least the Parity Amendment, as implemented by the Laurel-Langley Agreement, gave the capital-starved Filipinos theoretical parity – the same rights as Americans to exploit natural resources, andto own and control public utilities, in the United States of America. Here, movants’ interpretationwould effectively mean a unilateral opening up of our national economy to all foreigners, withoutany reciproc al arrangements . That would mean that Indonesians, Malaysians and Chinesenationals could effectively control our mining companies and public utilities while Filipinos, even ifthey have the capital, could not control similar corporations in these countries.

The 1935, 1973 and 1987 Constitutions have the same 60 percent Filipino ownership and controlrequirement for public utilities like PLOT. Any deviation from this requirement necessitates anamendment to the Constitution as exemplified by the Parity Amendment. This Court has no power toamend the Constitution for its power and duty is only to faithfully apply and interpret the Constitution.

WHEREFORE, we DENY the motions for reconsideration WITH FINALITY. No further pleadingsshall be entertained.











SO ORDERED.

ANTONIO T. CARPIO Associate Justice

WE CONCUR:

MARIA LOURDES P.A. SERENO Chief Justice

PRESBITERO J. VELASCO, JR. Associate Justice

TERESITA J. LEONARDO-DE CASTRO Associate Justice

ARTURO D. BRION Associate Justice

DIOSDADO M. PERALTA Associate Justice

LUCAS P. BERSAMIN

Associate Justice

MARIANO C. DEL CASTILLO

Associate Justice

ROBERTO A. ABAD Associate Justice

MARTIN S. VILLARAMA, JR. Associate Justice

JOSE PORTUGAL PEREZ Associate Justice

JOSE C. MENDOZA Associate Justice

BIENVENIDO L. REYES Associate Justice

ESTELA M. PERLAS-BERNABE Associate Justice

C E R T I F I C A T I O N

Pursuant to Section 13, Article VIII of the Constitution, I certify that the conclusions in the aboveResolution had been reached in consultation before the case was assigned to the writer of theopinion of the Court.

MARIA LOURDES P.A. SERENO Chief Justice

consti - gamboa v finance secretary (2012)

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